This week, BATS chief Bill O’Brien and IEX head Brad Katsuyama got into a verbal brawl over BATS’ alleged facilitating of front-running on its exchange.
That’s process by which high-frequency traders can execute orders fractions of a second faster than other market players.
They key moment came when Katsuyama, who figures prominently in Michael Lewis’ new book “Flash Boys,” challenged O’Brien to say where BATS gets its market data.
“What do you use to price trades in your matching engine on Direct Edge?” Mr. Katsuyama asked Mr. O’Brien.
“We use the direct feeds,” Mr. O’Brien said.
That wasn’t true.
Under pressure from the New York Attorney General’s office, the Wall Street Journal’s Scott Patterson reports, BATS issued a correction to O’Brien’s statement yesterday, saying that in fact two of its exchanges currently use NASDAQ’s securities information processor, aka The SIP, which is slower than direct feeds from the major exchanges, though they’d plan to transition off SIP in the coming months.
Patterson explains the significance of this admission:
The distinction matters because high-speed traders can use powerful computers and superfast links between markets to outpace traders and trading venues that rely on slower market data, such as the SIP…
High-speed traders typically use direct feeds to discern the current state of the market, since the SIP is too slow for them to execute their split-second strategies. The direct feeds also enable them to calculate which direction stocks are going before that information is reflected in SIP feeds, traders say.
“On their faster market data feeds, [high-speed traders] can see a price movement before it hits the slower consolidated feed, and sweep markets that they know use the slower feed,” said Dave Lauer, a former high-speed trader and president of KOR Group, a market-structure lobbying group.
In essence, high-frequency that have direct feeds can come to BATS to outpace other outlets that rely on the the SIP feed.